In one of the most closely-watched interest rate decisions since the financial crash, the Bank of England's Monetary Policy Committee (MPC) has voted 7-2 to increase the cost of borrowing to 0.5 basis points.

It reverses the rate cut of August 2016, which put the borrowing rate down to a historic low of 0.25 per cent. It also represents the first rate increase in more than a decade, the last being in July 2007 on a vote of 6-3.

“Businesses will be watching the reaction of consumers closely and what's important is the pace of any future rises,” she said. “As rates creep up, it'll be important to keep an eye on the impact for those at the lower end of the income scale.”

In the minutes of today's MPC meeting, members made it clear that they are moving cautiously, which caused the pound to tumble.

“Monetary policy continues to provide significant support to jobs and activity in the current exceptional circumstances,” the said. “All members agree that any future increases in bank rate would be expected to be at a gradual pace and to a limited extent.”

Jeremy Lawson, chief economist at Aberdeen Standard Investments, said the pace of the Bank's tightening cycle will be “intermediate” between that of the US Federal Reserve on the one hand and the European Central Bank and Bank of Japan on the other.

Lawson expects at least five rate increases in the US during the next two years, beginning in December.

“Despite the symbolic significance of today's rate increase, this will be a very shallow and gradual tightening cycle,” he said.

“We think the Bank will be able to lift rates at most only three more times over the next few years as Brexit uncertainty, lower potential growth and the elevated level of consumer credit hold down the interest rates that the economy can absorb without rolling over.”

Lisa Hooker, UK head of consumer markets at PwC, said today's increase should not have an immediate effect on shopping habits, meaning “Christmas retail sales should hold up”.

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“That said, October retail sales are likely to be subdued as a result of the timing of half term and milder weather impacting high street footfall,” she added.

“Consumers will begin to feel the effects of the rate rises in 2018 and, when this happens, it is families who will generally be hit harder than the young or retired.”

In a press conference following the announcement, Bank Governor Mark Carney insisted that UK households are “well positioned” for an increase in the cost of borrowing, with the majority of mortgages on fixed-rate deals. He also pointed out that even after today's rise, monetary policy is still “very loose”, and will continue to support the economy and keep unemployment low.

Pressed further on this point, Carney argued that raising rates will bring inflation down, and help protect consumers from falling real wages.

Deputy Governor Sir Dave Ramsden appeared alongside Carney at the press conference, but ducked the opportunity to say why he voted against today's rate rise. He was joined in his vote to hold rates by fellow Deputy Governor Sir John Cunliffe.

“Fully 60 per cent of mortgages are at fixed rates, and even with this bank rate increase many households will refinance onto lower interest rates than they are currently paying,” Carney said.

“I will give you two illustrations of that: by around 30 basis points for those moving off expiring two-year mortgages and by almost two percentage points for those moving off five-year deals.”

Currency traders had already priced in the interest rate rise, so what was widely described as a “dovish hike” proved an anti-climax for the pound. David Lamb, head of dealing at FEXCO Corporate Payments, said the Bank's rate-setters clearly “remain deeply worried about the lingering threats to Britain's economy”.

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“The 'unreliable boyfriend' has finally delivered, but it was far too half-hearted for the currency markets' taste,” he said.

“Mark Carney's prolonged campaign of hints had built market expectations up to such an extent that anything less than a full-blown hawkfest would be a disappointment – and so it proved.”

What Howard Archer of the EY ITEM Club says

“The BoE finally pulled the monetary policy trigger and delivered the expected interest rate hike from 0.25% to 0.50%, although a split 7-2 MPC vote reflected the case for higher interest rates was far from overwhelming.

“Given the MPC’s recent markedly more hawkish stance, a failure to follow through with an interest rate hike would have seriously threatened the BoE’s credibility. This is especially the case given that there have been a number of past instances where the BoE has indicated that an interest rate hike was on the cards and then failed to deliver one.

“The rise in consumer price inflation to 3.0% in September and the expectation that it will rise further to peak in October, an unemployment rate at a 42-year low of just 4.3% in the three months to August, ongoing rapid consumer credit growth and modestly improved GDP growth of 0.4% quarter-on-quarter (q/q) in Q3 clearly convinced the majority of MPC members that there was a justifiable case to edge up interest rates..

“There is critically a view within the BoE that the economy’s potential growth rate has lessened and there is now little slack left.

"Specifically, the MPC minutes observed that ‘Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures.’

“However, the fact that two MPC members voted against the interest rate hike highlighted the fact that there was also a realistic case for keeping interest rates at 0.25%.

"The two dissenters felt there was insufficient evidence that domestic inflationary pressures, particularly wage growth, would pick up in line with the central projections contained in the Quarterly Inflation Report. They also considered that there could be more slack in the economy than assumed.”